Syndication

Underwriting and vetting a syndication deal

The numbers, read from both chairs. The sponsor builds the model to make the deal clear; the passive investor reads it to find where the deal is hidden.

Most passive investors think they are doing diligence when they read the deck. The deck is the one document in the entire deal engineered to be believed. It is marketing, and its projections are the sponsor’s best case dressed as a forecast. Diligence starts where the deck stops.

The sponsor and the investor read the same numbers; only one of them is looking for the part that was left out.

The sponsor builds the model to win the deal: acquisition price, rent growth, expense load, exit cap rate, refinance timing, reserves. The investor’s job is to run the same model with the assumptions turned hostile, because a deal that only survives its own optimism is not a deal, it is a hope with a wire instruction. Rate goes up two points. Vacancy runs high for a year. The refinance does not happen on schedule. The exit cap expands instead of compressing. Any one of those can turn a projected sixteen percent internal rate of return into a capital call.

Then there is the sponsor. Track record, real co-investment, prior deals that went sideways and how they were handled. A sponsor with no money in the deal is selling you risk and keeping the fees.

Start below with where deals come from, how to underwrite the property, and the red flags that should stop a wire before it sends.

Inside this hub

Finding the deal: why the best ones are never listed

By the time a deal is broadly marketed, it is priced for the buyer pool, not for you. Where a sponsor sourced a deal is itself a diligence signal, because it tells you whether there is any margin of safety in the basis.

Underwriting the property: the exit cap is the dangerous number

The whole deal lives or dies on a handful of spreadsheet assumptions, and the most dangerous one is the exit cap rate, a guess about the future dressed as a number. A small change in it moves the return more than years of operations.

The five numbers, and the one the sponsor optimizes

Five numbers describe every syndication, each answering a different question, so a deal that shines on one can be mediocre on another. The number the promote is measured against is the number the sponsor will optimize, sometimes against you.

Stress-testing: the base case is a hope

The deal to evaluate is not the base case. It is the one where several things go wrong at once, because in a downturn they always do. Single-variable sensitivity tables understate risk because the real world moves the variables together.

Vetting the sponsor: the track record is the least useful part

The track record is the most cited and least useful diligence item, because it is curated and backward-looking. The number that actually predicts behavior is how much of the sponsor's own money is in the deal.

Reading the PPM for what it hides

The private placement memorandum is written by the sponsor's lawyers to protect the sponsor, which makes it the most honest document in the raise and the least read. The risk factors are a confession, and the 'may' clauses are a wish list.

Fee-load analysis: where a fair deal quietly turns bad

Two deals with the same headline returns can deliver very different amounts to the investor after the sponsor's fees and promote. The total load, not any single fee, is what matters, and fees get paid whether the deal performs or not.

The diligence almost everyone skips: background and references

The check that catches the sponsors who will hurt you is not financial. It is the litigation search and the reference call to investors from deals that went badly, because a good deal run by a dishonest sponsor is worse than a mediocre one run by an honest sponsor.

Red flags for a passive investor

Every clause in this section, distilled into what to check before you wire. The terms that should make you pause, the ones that should make you walk, and where to read the detail on each. Use this as the last pass over an operating agreement before you commit money you cannot get back.

This is all free.

For anything involving the filing or management of your LLC, I'm your LLC guy.

If you need help with structuring a syndication deal, you don't have to figure out who to call. Start with me. I'll understand what you need, and with my gigantic Rolodex, I can put you in touch with the right specialist for you.

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Keep reading

Syndication 21 Regulation D: the exemption every syndication runs on Registering a securities offering costs more than most syndications are worth, so nearly every deal relies on Regulation D Rule 506. What the exemption is, what it preempts, and why you build the file to prove it before you ever need to.

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